Huntington National Bank 2012 Annual Report Download - page 155

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147
The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for
the years ended December 31, 2012 and 2011:
Fair Value Method
(dollar amounts in thousands) 2012 2011
Fair value, beginning of year $ 65,001 $ 125,679
Change in fair value during the period due to:
Time decay (1) (2,881) (4,966)
Payoffs (2) (14,389) (19,464)
Changes in valuation inputs or assumptions (3) (12,529) (36,248)
Fair value, end of year $ 35,202 $ 65,001
Weighted-average life (years) 3.2 3.2
(1) Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments an
d
partial loan paydowns.
(2) Represents decrease in value associated with loans that paid off during the period.
(3) Represents change in value resulting primarily from market-driven changes in interest rates and prepayment spreads.
Amortization Method
(dollar amounts in thousands) 2012 2011
Carrying value, beginning of year $ 72,434 $ 70,516
N
ew servicing assets create
d
36,123 32,505
Impairment charge (4,374) (17,649)
Amortization and other (18,638) (12,938)
Carrying value, end of year $ 85,545 $ 72,434
Fair value, end of year $ 85,612 $ 72,586
Weighted-average life (years) 3.3 3.4
MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and
conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow
model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments,
delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions
used may have a significant impact on the valuation of MSRs.
MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected
outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington
hedges the value of certain MSRs against changes in value attributable to changes in interest rates using a combination of derivative
instruments and trading securities.
For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value to changes in these
assumptions at December 31, 2012, and 2011 follows:
December 31, 2012 December 31, 2011
Decline in fair value due to Decline in fair value due to
10% 20% 10% 20%
adverse adverse adverse adverse
(dollar amounts in thousands) Actual change change Actual change change
Constant prepayment rate (annualized) 19.52 % $ (2,608) $ (5,051) 20.11 % $ (4,720) $ (9,321)
Spread over forward interest rate swap rates 1,288 bps (1,290) (2,580) 650 bps (1,511) (3,023)